08/31/2012

Manne on SEC Insider Trading Charges in Sanofi Deal

Federal securities regulators charged eight people in Georgia with insider trading on Tuesday, saying they bought stock in a company ahead of a merger announcement after one of them learned about a pending deal.

The Securities and Exchange Commission said that Thomas D. Melvin Jr., an accountant from Griffin, Ga., learned from a client that the drug giant Sanofi-Aventis was planning to buy Chattem, a pharmaceutical-products company that was then publicly traded. The client, who was a director of Chattem, was seeking Mr. Melvin’s advice on the deal’s tax implications on his stock options and made it clear that the discussion was confidential, the S.E.C. said.

Nevertheless, Mr. Melvin leaked the news of the possible deal to four of his friends — C. Roan Berry, Michael S. Cain, Joel C. Jinks and R. Jeffrey Rooks — the commission charged. That set off another chain of illegal tips as Mr. Berry passed the news onto Ashley J. Coots, who, in turn, tipped his friend Casey D. Jackson, according to the complaint. The S.E.C. also said that Mr. Cain, a stockbroker, told Peter C. Doffing about the secret transaction.

This prompted an email from my friend and hero Henry Manne, which he has kindly permitted me to reprint below:

Do we really want to police all such personal conversations? Do we really want the day-to-day conversations of people like the ones involved here to be threatened by SEC monitoring?

This is a good illustration of the civil liberties danger our insider trading law enforcement threatens.

Perhaps I am simply obsessed with a topic I've been around for too long, but I do indeed feel like shouting from the rooftops "Hey, the SEC is fucking us over." Why isn't the liberal community even taking notice?

Do people really believe that this sort of investigation, conducted on a scale required to stop insider trading would be completely benign or is worth more than the implied costs? But there is a paradox in all this, since the best response to the kinds of concerns I've just mentioned is that there really is no threat to our civil liberties because the whole thing is just Kabuki theater. No one in his right mind would believe that the SEC scratches more than a very bare tip (the parts easily spotted) of a very large iceberg. (An interesting movie could be made out of the story line implied by this case focusing on interpersonal relationships not generally considered a danger to the community.)

That in turn bears out my old argument (as well as Dooley's) that effective enforcement of these laws is impossible, and, therefore, it is better not to try. For 46 years I have tried to get the army of commentators on this topic to consider the problems (and the economics) of enforcement. To date only Dooley and Bainbridge have taken up my challenge. These show prosecutions do have an effect: they drive the right people out of the market for information and put it more and more into the hands of those willing to take risks (e.g. the Al Capones of the stock market) or of naifs such as are involved in the instant case.

Comments

Federal securities regulators charged eight people in Georgia with insider trading on Tuesday, saying they bought stock in a company ahead of a merger announcement after one of them learned about a pending deal.

The Securities and Exchange Commission said that Thomas D. Melvin Jr., an accountant from Griffin, Ga., learned from a client that the drug giant Sanofi-Aventis was planning to buy Chattem, a pharmaceutical-products company that was then publicly traded. The client, who was a director of Chattem, was seeking Mr. Melvin’s advice on the deal’s tax implications on his stock options and made it clear that the discussion was confidential, the S.E.C. said.

Nevertheless, Mr. Melvin leaked the news of the possible deal to four of his friends — C. Roan Berry, Michael S. Cain, Joel C. Jinks and R. Jeffrey Rooks — the commission charged. That set off another chain of illegal tips as Mr. Berry passed the news onto Ashley J. Coots, who, in turn, tipped his friend Casey D. Jackson, according to the complaint. The S.E.C. also said that Mr. Cain, a stockbroker, told Peter C. Doffing about the secret transaction.

This prompted an email from my friend and hero Henry Manne, which he has kindly permitted me to reprint below:

Do we really want to police all such personal conversations? Do we really want the day-to-day conversations of people like the ones involved here to be threatened by SEC monitoring?

This is a good illustration of the civil liberties danger our insider trading law enforcement threatens.

Perhaps I am simply obsessed with a topic I've been around for too long, but I do indeed feel like shouting from the rooftops "Hey, the SEC is fucking us over." Why isn't the liberal community even taking notice?

Do people really believe that this sort of investigation, conducted on a scale required to stop insider trading would be completely benign or is worth more than the implied costs? But there is a paradox in all this, since the best response to the kinds of concerns I've just mentioned is that there really is no threat to our civil liberties because the whole thing is just Kabuki theater. No one in his right mind would believe that the SEC scratches more than a very bare tip (the parts easily spotted) of a very large iceberg. (An interesting movie could be made out of the story line implied by this case focusing on interpersonal relationships not generally considered a danger to the community.)

That in turn bears out my old argument (as well as Dooley's) that effective enforcement of these laws is impossible, and, therefore, it is better not to try. For 46 years I have tried to get the army of commentators on this topic to consider the problems (and the economics) of enforcement. To date only Dooley and Bainbridge have taken up my challenge. These show prosecutions do have an effect: they drive the right people out of the market for information and put it more and more into the hands of those willing to take risks (e.g. the Al Capones of the stock market) or of naifs such as are involved in the instant case.